334 F.

2d 704

William H. LEGATE, Claimant, Appellant,

v.
J. Joseph MALONEY, Jr., Receiver, Appellee.
No. 6287.

United States Court of Appeals First Circuit.

July 13, 1964.

Mark M. Horblit, Boston, Mass., with whom Samuel H. Kalish and Peter
R. Tritsch, Boston, Mass., were on brief, for appellant.
Marcien Jenckes, Boston, Mass., with whom Robert M. Gargill and
Charles H. Morin, Boston, Mass., were on brief, for appellee.
Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH,
Circuit Judges.
ALDRICH, Circuit Judge.

This is an appeal from a final judgment of the district court, entered under F.R.
Civ.P. 54(b) following a memorandum decision, reported in Securities &
Exchange Comm. v. duPont, Homsey & Co., 204 F.Supp. 944, and a further
opinion and order confirming, except in one respect, a detailed report of a
special master. An earlier appeal was ordered dismissed as premature. Legate v.
Maloney, 1 Cir., 1962, 308 F.2d 228, cert. den. 372 U.S. 912, 83 S.Ct. 721, 9
L.Ed.2d 720. The questions arise in a receivership proceeding instituted on the
complaint of the Securities and Exchange Commission winding up a brokerage
firm, duPont, Homsey & Company, of which one Homsey was the managing
partner. The firm was a member of the New York Stock Exchange, hereinafter
the Exchange. Legate, the appellant, was, for the final year and a half, a limited
partner. A retired small businessman, he had previously been a customer of the
firm, and continued to be one. In the receivership proceeding appellant sought
to rescind his limited-partnership agreement and to make claims as a creditor in
lieu thereof, and to establish certain priorities. Alternatively, he claimed items
allegedly due him under the agreement. Conversely, the receiver, appellee
herein, sought, by way of counterclaim, to recover withdrawals by appellant

from his capital account, allegedly in violation of the agreement. Also involved
were various claims and cross-claims on appellant's customer's account by, and
against, the receiver and for certain other relief. Finally, appellant sought to
establish a claim against the Exchange, which the court declined to hear.
2

We have considered appellant's many contentions, legal as well as factual, but

find only three requiring discussion. And with respect to these, since the
evidence has not been reported, we must accept the master's findings and
conclusions unless inconsistent or plainly wrong in the light of his subsidiary
findings.

Our decision as to appellant's claim of rescission could rest upon either of two
grounds. In the first place a limited partnership is wholly statutory. Lancaster v.
Choate, 1863, 5 Allen (Mass.) 530. Under Massachusetts law it may be doubted
whether even a limited partner may assert equitable rights as against innocent
creditors. See Mass.G.L. c. 108A 6(2), 39(a) and (b); c. 109 29. For the
earlier equity rule see, e. g., Richards v. Todd, 1879, 127 Mass. 167; Perry v.
Hale, 1887, 143 Mass. 540, 542, 10 N.E. 174; 1 Rowley, Partnership 39.0, at
p. 753 (2d ed. 1960); Lindley, Partnership 599 (11th ed. Salt & Francis 1950);
see also Van Andel v. Smith, 10 Cir., 1957, 248 F.2d 915, 918. One of the
incidents of a limited partnership, no less than of a general partnership, is that
representations as to capital contributions are made to the creditors of the firm.
Cf. Mass.G.L. c. 109 2, 16, 17 and 23. In the case of Richards v. Todd,
supra, on which appellant relies in other particulars, the court carefully
restricted the effect of rescission ab initio to "as between the parties," and
declared that since the defrauded partner "by holding himself out as a member
of the firm rendered himself liable to creditors of such apparent firm," he was
entitled to an indemnity. Id., 127 Mass. at 173. None of appellant's cases holds
to the contrary.

However, it is not necessary to reach this broad question. Appellant has not
shown as plainly wrong the master's conclusory finding that the conduct of
Homsey, "insofar as it is a question of fact, does not afford a basis for
rescission." Appellant speaks of misrepresentation and concealment. We
recognize no relationship here which would condemn concealment, as such,
apart from the extent that such concealment might have made any affirmative
representations materially false. Nor are we concerned with cases cited by
appellant where a party concealed the fact that he was obtaining a secret
advantage, and so could be said to have made an implied misrepresentation.

The affirmative representations found by the master were as follows.

1. That the firm was stable and of good reputation, and its standing
"impeccable." The master found that "the partnership was not below standard
financially."1 He also found that the basis for prior criticisms of the firm's
failure to meet certain capital requirements of the Exchange had been attended
to and cured. To the extent that any greater standing or repute was implied in
the above characterizations, or by the word "impeccable," this would seem a
typical example of seller's talk or "puffing." Deming v. Darling, 1889, 148
Mass. 504, 20 N.E. 107, 2 L.R.A. 743, cited with approval in Fogarty v. Van
Loan, 1962, 344 Mass. 530, 532, 183 N.E. 2d 111; Boston Consol. Gas Co. v.
Folsom, 1921, 237 Mass. 565, 130 N.E. 197.

2. That an investment in the firm would be "safe" and "profitable." This is mere
classic "prophecy." Lynch v. Pennsylvania R. R., 1947, 320 Mass. 694, 695, 71
N.E.2d 114; Harris v. Delco Products, Inc., 1940, 305 Mass. 362, 25 N.E.2d
740; Fogarty v. Van Loan, supra.

3. That Homsey was "affluent." Whatever this may mean,2 appellant's evidence
to indicate its untruthfulness, that Homsey made expensive personal
borrowings from money lenders, established, on the master's findings, nothing
which "jeopardize[d] the position of the firm in any way."

4. Finally, the master found that appellant "was impressed by * * * the

Exchange's advertising campaign * * * to place faith in the firm" because of its
membership. Possibly because the court refused to entertain appellant's
attempted claim against the Exchange he failed to introduce evidence of what
sort of representations the Exchange made, or, at any rate, failed to bring them
to our attention. We cannot, accordingly, consider them for present purposes as
having been actionable misrepresentations as distinguished from mere general
puffing.

10

Summarizing, even if appellant's rescission claim is taken at its full value, the
only matters that were kept from him related to circumstances which had
caused, or in some cases merely had threatened to cause, past violations of
certain fiscal requirements of the Exchange. There was no misstatement as to
any present violation, or as to existing assets, or, in any substantial matter, as to
any firm liability. Nor did these events of which appellant complains reflect
upon Homsey's morals or ethics. The debacle came from Homsey's launching
into a career of manipulation and embezzlement following appellant's entry into
the firm, and was not shown to be connected with any prior event. While,
conceivably, he might have found the other way, the master's conclusion that
appellant was not materially misled was not plainly wrong.

11

However, when we come to a charge on Legate's customer's account (as to one

item, only) and the master's handling of the receiver's claim that Legate should
be held responsible for Homsey's misconduct because of his failure to disclose
Homsey's misdoings before matters reached irremediable proportions, we have
difficulties.3 In November 1959 Homsey purchased 1000 shares of American
Motors. The trading slips were all in Homsey's handwriting, but showed Legate
as the purchaser. There is no indication that Legate knew anything of this, and
the shares were subsequently paid for by the firm. In January 1960 Homsey
purchased 2000 shares of Studebaker-Packard. These, too, were paid for by the
firm. On February 11 Legate and Homsey went to Florida to visit some friends
of Homsey's. Before departing Homsey told Legate that for procedural reasons
he had put "a few shares" of American Motors and Studebaker-Packard in
Legate's account. Legate protested, saying that he did not want the shares and
had no money to pay for them. He was finally prevailed upon to give Homsey
two blank checks, with the understanding that the entire transaction was to pass
through him simply for the firm's bookkeeping purposes, that the stock was not
to belong to him, that his account would be credited with firm money before his
checks were negotiated, and that the whole matter would be shortly taken off
the books so far as he was concerned. On Legate's return from Florida in April
or May he discovered that the matter had not been taken off the books. On the
contrary, his account stood debited as of February 18 with $107,481 as the
balance due, over and above the checks, to pay, not for "a few shares," but for
the 3,000 shares above stated. The prices charged to him, incidentally, were
Homsey's initial purchase prices, and not the substantially reduced value of the
stock as of February 18. Legate protested to Homsey, and was told that the
matter would be taken care of. At the time he received a statement from the
firm's accountants showing these transactions as his. He twice refused to sign
an acknowledgment of the correctness of the statement. On the other hand, he
did not say why, but kept his own counsel. Nor, apparently, did he again check
back to see whether Homsey had righted the matter. In fact, Homsey sold out
the stock in June at a "loss" to Legate's account of $17,693.

12

In spite of having made all of the above specific findings the master concluded,
apparently because it was not unusual for Legate to trust Homsey with blank
checks, that Legate had "authorized" the personal acquisition of this stock, and
so was chargeable with the loss. In our opinion such a conclusion, either by way
of authorization or ratification, cannot stand in the light of these subsidiary
findings. Legate may have been over-trusting, but as between himself as a
customer and the firm he was not a purchaser.

13

Singularly enough, when he came to the receiver's claim against Legate

because of his failure to disclose that Homsey was playing fast and loose with

his account and so might be doing the same with others, the master proceeded
on a quite different basis. If, in fact, Legate had authorized the American
Motors and Studebaker-Packard transactions Homsey's maximum misconduct
was an over-extension of credit to Legate. The master did not treat Legate's
non-communication on this basis. Rather, he expressly found that Legate "did
not report the matter to anyone but Homsey because he felt that Homsey `would
take care of it' and that these securities would be taken off his account." Yet
obviously there could be no reason for the shares to be taken off Legate's
account if he had authorized the transaction as a purchase rather than as a
bookkeeping convenience "to be taken care of" by Homsey.
14

The master's findings in these two matters are irreconcilable. For the reasons
stated an adjustment must be made with respect to the claimed $17,693 loss
which the receiver debited against Legate's account.4

15

Consideration of appellant's dismissed petition against the Exchange, which

asserted misrepresentation, non-disclosure, and failure to live up to its rules and
regulations, but for which, allegedly, he would not have been induced to
become a member of the firm, requires a further recitation. The Exchange is,
and has been at all times presently material, the assignee (by payment) of
certain substantial customers' claims against the firm, claims which under no
eventuality will be fully satisfied. Indeed, although the receiver exists as a
separate party, and will have certain personal claims, the real parties in interest
and in competition with each other in the present proceedings are appellant and
the Exchange. This fact is not concealed by the circumstance that the Exchange
has assigned its interests to an attorney who, it so happens, is representing the
receiver on this appeal.5 As the Exchange's "nominee" or alter ego he filed a
claim in the general receivership proceedings, and is and was directly
financially interested in various aspects, particularly in the receiver's claim
against appellant for failure to disclose Homsey's misdoings. In fact in the
Receiver's Counterclaim which he signed as counsel for the receiver it was
asserted, inter alia, that appellant's non-disclosure was a violation of his "duty
to * * * the Exchange." While, perhaps, this allegation was only a makeweight
for the receiver's claim on behalf of the creditors as a whole, it is an apt
reminder of who those creditors really are.

16

This is an equitable proceeding. It cannot be that the Exchange can come in as a

claimant through a nominee, and through the receiver prosecute claims against
appellant for its ultimate benefit, and then say, either as a matter of right or of
the district court's discretion,6 that it is not "here" when appellant wishes to
fight back. We see no impropriety in the Exchange being represented by a
nominee, as a matter of procedure, even when that nominee acts for the receiver

as well, so long as there is no conflict of interest. But the Exchange cannot stick
its head in the sand and avoid the normal consequences of its presence. One of
those consequences is that it must be here defensively as well as aggressively.
Alexander v. Hillman, 1935, 296 U.S. 222, 241-42, 56 S.Ct. 204, 80 L.Ed. 192.
The order dismissing appellant's petition was error.
17

Judgment will be entered vacating the judgment of the district court and
remanding the action for further proceedings not inconsistent herewith.

Notes:
1

It is true that because of prior infractions of its regulations the Exchange

required the firm to maintain a higher margin of credit than usual, a matter
Homsey did not disclose to appellant. However, the firm did thereafter
conform. Neither the infraction nor the conformance has been shown to have
injured the firm

The master did not find, in the words of appellant's brief, that Homsey said he
was "a millionaire."

The master found against the receiver as to this latter issue, and he has not
appealed, but the relevancy of this portion of the case will appear later

This might, correspondingly, suggest a reopening of the master's finding in

Legate's favor with respect to his non-disclosure of Homsey's misconduct.
While we do not decide that even though the receiver has not appealed we have
no authority to reopen that matter if otherwise there would be an evident
miscarriage of justice, this could not be the case here. As we have pointed out,
the master's finding against the receiver already assumed that Legate had
knowledge of the impropriety of this transaction

It is to be noted that six pages of the "receiver's" brief are devoted to arguing
that the petition which appellant sought to have heard against the Exchange
was properly dismissed for lack of jurisdiction

The district court appears to have dismissed appellant's petition against the
Exchange on both grounds. Seemingly it was misled by the nominee
arrangement, for its opinion recites, "The Exchange is asserting no claim
against the assets of the receivership," a statement that is echoed in the
receiver's brief. It is hard to see how that is so. The fact that, for reasons not
worth developing, the Exchange by its nominee became a claimant under
circumstances that might entitle it to be termed a Good Samaritan, does not

meet the fact that any generosity on its part was not directed towards
eliminating claims against appellant. Rather, the Exchange would be the direct
beneficiary of those claims